Brookings-Wharton Papers on Urban Affairs 2000 (2000) 139-146
[The Future of Urban Research: Nonmarket Interactions]
Vernon Henderson: Edward Glaeser argues persuasively that a significant portion of future urban research will be focused on the role of nonmarket interactions. I have taught my students for the past twenty-five years that urban economics distinguishes itself from the rest of economics by its focus on the causes and consequences of close spatial proximity, with key aspects of the phenomenon involving externalities. That the future holds more of the same is reassuring.
Traditional approaches in the urban literature tend to view cities as necessary evils. The conventional wisdom is that spatial proximity is needed in order to exploit scale externalities, such as localized information spillovers, in production, but that this proximity breeds almost exclusively negative externalities on the consumption side. The list includes congestion, pollution, noise and health externalities, crime, discrimination, and other antisocial behavior. A considerable portion of the urban literature has examined the dimensions and policy prescriptions to deal with these negative nonmarket interactions.
What is refreshing about Glaeser's perspective is the focus on the positive aspects of close proximity. Apart from information spillovers in production, his paper examines human-capital spillovers, peer-group effects, social capital, and altruism as they relate to spatial proximity, density, and urban scale. Second, he looks beyond traditional issues of how urban economics might quantify the magnitude of damages or gains from aggregate scale externalities or human-capital spillovers.
Following, for example, the theoretical models of Masahisa Fujita, Robert W. Helsley and William C. Strange, and Gilles Duranton and Diego Puga, which spell out the microfoundations of scale externalities, Glaeser joins the call for urban economists to investigate microfoundations of externalities [End Page 139] empirically. 1 In the 1990s such an agenda for economists has been supported by both the National Science Foundation and the MacArthur Foundation. The work of Adam B. Jaffe, Manuel Trajtenberg, and Rebecca Henderson on patent citations initiates the practical inquiry about the nature of information flows. 2 Whom do firms learn from and how do they learn? Do they learn by trading employees back and forth in the labor market, through the gossip by buyers and sellers who come to the firm, through the local social circuit, and so on? Or, as another example, in an urban endogenous-growth model by Duncan Black and J. Vernon Henderson, local human-capital accumulation both enriches static information spillovers and leads to more innovation. 3 Can these two effects be disentangled?
This agenda is a difficult one for the obvious reasons. Nonmarket transactions are difficult to observe, unlike market ones. So we can get snapshots of a process such as citations for patents, but these represent only a small fraction of the flows of ideas. We can try to make indirect inferences. Are productivity benefits of scale closely related to spatial proximity? Do they relate to turnover in the labor market? Do they relate to frequency of socialization? There are doubtless other connections that could be drawn. But all these are items that are difficult to measure and they raise difficult identification issues in econometrics. As Glaeser points out, in identifying the beneficial and harmful effects of different types of peer groups, we need to control for the endogeneity of the groupings. And moreover, we have so far only investigated productivity gains for manufacturing, when in fact it is tradable services that are drawn to the largest metropolitan areas. We understand little about externalities among service activities.
Glaeser turns to a variety of phenomena economists rarely study that are of great interest. He looks at happiness indexes, socialization, and political preferences as they are affected by external opportunities to socialize. The reasons why we would expect city size and density--spatial proximity--to be related to, say, socialization are well articulated. Table 2 contains results on city size and aspects of socialization, with the required demographic controls, yielding weak associations. But in tables 2-5 there seems to be a general indication that aspects of socialization may decline, or at least not increase to...